What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2022-01-04 compared with 2020-12-22 · 243 added, 269 removed, 521 unchanged (50% of the section changed)

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Our Class A Common Stock is traded on the New York Stock Exchange under the symbol “HOV”

and was held by 322 stockholders of record at December 11, 2020. There is no established public trading market for our Class B Common Stock, which was held by 190 stockholders of record at December 11, 2020.

and was held by 292 stockholders of record at December 10, 2021. There is no established public trading market for our Class B Common Stock, which was held by 180 stockholders of record at December 10, 2021.

If a shareholder desires to sell shares of Class B Common Stock (other than to Permitted Transferees (as defined in the Company’s amended Certificate of Incorporation)), such stock must be converted into shares of Class A Common Stock at a one to one conversion rate. 

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The maximum number of shares that may yet be purchased under the Company’s repurchase plans or programs is 22 thousand.

SELECTED FINANCIAL DATA

The following table sets forth our selected consolidated financial data and should be read in conjunction with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

and our Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K. 

Summary of Consolidated Statements of Operations Data

(In thousands, except per share data)

Expenses excluding inventory impairment loss and land option write-offs

Inventory impairment loss and land option write-offs

Total expenses

Gain (loss) on extinguishment of debt

Income (loss) from unconsolidated joint ventures

Income (loss) before income taxes

State and federal income tax provision

Net income (loss)

Per share data:

Net income (loss) per common share

Weighted-average number of common shares outstanding

Assuming dilution:

Net income (loss) per common share

Weighted-average number of common shares outstanding

Summary of Consolidated Balance Sheet Data

(In thousands)

Total assets(1)

Mortgages and lines of credit (1)

Term loans and revolving loans, senior notes, senior amortizing notes, senior exchangeable notes and tangible equity unit (“TEU”) senior subordinated amortizing notes (net of discounts and premiums)

Total equity deficit

(1) In connection with our adoption of Accounting Standards Update 2015-03 in November 2016, certain prior year amounts for unamortized debt issuance costs were reclassified between the lines “Total assets”

and “Mortgages and lines of credit”

and “Term loans and revolving loans, senior notes, senior amortizing notes, senior exchangeable notes and TEU senior subordinated amortizing note (net of discounts and premiums)”.

ITEM 6 Reserved

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Key Performance Indicators

The following key performance indicators are commonly used in the homebuilding industry and by management as a means to better understand our operating performance, trends affecting our business and compare our performance with the performance of other homebuilders.

The following key performance indicators are commonly used in the homebuilding industry and by management as a means to better understand our operating performance and trends affecting our business, and compare our performance with the performance of other homebuilders.

We believe these key performance indicators also provide useful information to investors in analyzing our performance:

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Cancellation rates as compared to prior periods can be an indicator of market strength or weakness.   

Market Conditions and COVID-19 Impact and Strategy 

The demand for new and existing homes is dependent on a variety of demographic and economic factors, including job and wage growth, household formation, consumer confidence, mortgage financing, interest rates and overall housing affordability.

In general, at the start of our fiscal year, factors including rising levels of household formation, a constrained supply of new and used homes, wage growth, strong employment conditions and mortgage rates that continue to be low by historical standards were contributing to improving conditions for new home sales.

However, this year, overall economic conditions in the United States have been, and continue to be, impacted negatively by the COVID-19 pandemic, which has resulted in, among other things, quarantines, "stay-at-home" or "shelter-in-place" orders, and similar mandates from national, state and local governments that have substantially restricted daily activities and caused many businesses to curtail or cease normal operations.

Notwithstanding these developments, all of the state and local governments in the markets in which we operate have deemed housing to be an essential business, which has allowed us to continue with construction and sales of homes. Although most of the states in which we operate have begun to resume normal business operations, the United States continues to struggle with rolling outbreaks of the virus.

Accordingly, we cannot predict the magnitude of either the near-term or long-term effects that the pandemic will have on our business.

Earlier this year, in response to the pandemic, we actively took steps to navigate through this extraordinary period by placing our highest priority on helping to protect the health and safety of our associates, trade partners and customers.

Among other measures, we implemented appropriate health and safety protocols so that our community construction and sales activities, wherever authorized, could continue operations.

During the second quarter of fiscal 2020 and the initial impact of COVID-19, we experienced adverse business conditions, including a slowdown in customer traffic and sales pace and an increase in cancellations.

To mitigate the adverse impacts, we implemented initiatives to maximize positive cash flow, retain a strong liquidity position and optimize our organization, which included focusing on closing homes in backlog and limiting cash expenditures, reducing or delaying certain land purchases and land development activity and beginning work on unsold homes and electing to draw in full the $125.0 million available under its Secured Credit Agreement (which was repaid in the third quarter of fiscal 2020).

Further, in May 2020, we announced certain operational optimization measures including streamlining the organizational structure by:

(1) transitioning from three homebuilding operational Groups to two;

(2) consolidating several business units, resulting in the reduction of three Divisional offices;

and (3) gradually phasing out of the Chicago market as it sells through its existing communities.

In addition, we took measures to reduce overhead expenses through a combination of furloughs, layoffs and other cost reduction measures, the implementation of which was completed in early fiscal 2021. We incurred costs of $2.9 million for severance and other related expenses in the third quarter of fiscal 2020 as a result of this restructuring. We expect the measures described above to reduce our annualized overhead expense by approximately $20 million beginning in fiscal 2021.

However, the recent improved conditions in the homebuilding market have led to increases in other selling, general and administrative costs, including for example, stock compensation and bonuses based on profitability, which we expect will more than offset these annualized savings.

While the broader economic recovery following the nationwide COVID-19 related shutdown is ongoing and there continues to be uncertainty surrounding the virus and various re-opening strategies, the homebuilding industry generally was only impacted from mid-March through April of 2020.

Towards the end of April, economic conditions in our markets started to improve, and this improvement continued throughout our fiscal third and fourth quarters, due to what we believe is a combination of factors including low interest rates, low inventory levels of existing homes and a general desire for more indoor and outdoor space.

Market Conditions and Operating Results

In general, at the start of fiscal year 2020, factors including rising levels of household formation, a constrained supply of new and used homes, wage growth, strong employment conditions and mortgage rates that continue to be low by historical standards were contributing to improving conditions for new home sales.

In March 2020, as a result of the initial impact of COVID-19, we experienced adverse business conditions, including a slowdown in customer traffic and sales pace and an increase in cancellations.

However, beginning in May 2020, the homebuilding market rapidly improved, due to what we believe is a combination of factors including low interest rates, low inventory levels of existing homes and a general desire for more indoor and outdoor space.

During the third quarter and continuing through the fourth quarter of fiscal 2020, we returned to our normal activities with respect to land purchases, land development and resuming the construction of unsold homes.

As a result, our operating metrics improved significantly as compared to fiscal 2019, as described below. 

Although many of our key metrics have improved since the end of the second quarter of fiscal 2020, the full magnitude and duration of the COVID-19 pandemic is unknown.

We may experience material declines in our net contracts, deliveries, revenues, cash flow and/or profitability during fiscal 2021 and beyond, compared to the corresponding prior-year periods, and compared to our expectations at the beginning of our 2020 fiscal year.

In addition, if conditions in the overall housing market or in a specific market worsen in the future beyond our current expectations, if future changes in our business strategy significantly affect any key assumptions used in our projections of future cash flows, or if there are material changes in any of the other items we consider in assessing recoverability, we may recognize charges in future periods for inventory impairments related to our current inventory assets or other reorganization activities.

Any such charges could be material to our consolidated financial statements. 

Operating Results

We experienced overall positive operating results for the year ended October 31, 2020 as follows:

Our cash position allowed us to spend $624.2 million on land purchases and land development during fiscal 2020, and still have total liquidity of $399.1 million, including $262.5 million of homebuilding cash and cash equivalents as of October 31, 2020 and $125.0 million of borrowing capacity under our senior secured revolving credit facility. 

As a result, our operating metrics improved significantly in fiscal 2020 as compared to fiscal 2019, and improved even further in fiscal 2021, as described below.

Our cash position allowed us to spend $698.3 million on land purchases and land development and to repurchase $180.9 million of senior secured notes during fiscal 2021, and still have total liquidity of $380.9 million, including $246.0 million of homebuilding cash and cash equivalents as of October 31, 2021 and $125.0 million of borrowing capacity under our senior secured revolving credit facility as of October 31, 2021. 

Additional results for the year ended October 31, 2021 were as follows:

For the year ended October 31, 2020, sale of homes revenues increased 15.5% as compared to the prior year, as a result of a 15.0% increase in deliveries, primarily due to our increased community count that occurred during fiscal 2019 and our 39.2% increase in sales absorption pace in fiscal 2020 as compared to fiscal 2019.

For the year ended October 31, 2021, sale of homes revenues increased 18.7% as compared to the prior year, as a result of a 9.1% increase in deliveries, from the sustained strong homebuilding market and high demand for new home construction that began in fiscal 2020, along with an increase in average sales price.

Gross margin percentage increased from 14.7% for the year ended October 31, 2020 to 18.6% for the year ended October 31, 2021, and gross margin percentage, before cost of sales interest expense and land charges, increased from 18.4% for the year ended October 31, 2020 to 21.8% for the year ended October 31, 2021.

The increases were primarily due to the mix of communities delivering compared to the prior year, along with increases in home prices in virtually all of our markets during the last half of fiscal 2020. 

Selling, general and administrative costs (including corporate general and administrative expenses) increased $8.7 million for the year ended October 31, 2020 as compared to the prior year, primarily as a result of our increased community count at the beginning of the year and our 15.0% increase in deliveries, along with a lower adjustment to our warranty reserves (as a result of our annual actuarial analysis) in fiscal 2020 as compared to fiscal 2019.

However, as a percentage of total revenue, such costs decreased to 10.3% for the year ended October 31, 2020 compared to 11.6% for the year ended October 31, 2019.

Pre-tax income increased to $55.4 million for the year ended October 31, 2020 from a pre-tax loss of $39.7 million for the year ended October 31, 2019.

Net income increased to $50.9 million for the year ended October 31, 2020 from a net loss of $42.1 million for the year ended October 31, 2019.

Earnings per share, basic and diluted, increased to $7.48 and $7.03, respectively, for the year ended October 31, 2020 compared to loss per share of $7.06, both basic and diluted, for the year ended October 31, 2019.

Net contracts increased 30.2% for the year ended October 31, 2020, compared to the prior year.

Net contracts per average active selling community increased to 54.3 for the year ended October 31, 2020 compared to 39.0 in the prior year.

This increase represents our highest net contracts per average active selling community in over a decade.

This strong absorption pace resulted in our active selling communities at October 31, 2020  decreasing by 17.7% compared to October 31, 2019.

Contract backlog increased from 2,191 homes at October 31, 2019 to 3,402 homes at October 31, 2020, with a dollar value of $1.4 billion, representing a 61.3% increase in dollar value compared to the prior year.

The increases were primarily due to increases in home prices in virtually all of our markets during fiscal 2021 as a result of the strong housing market.

Selling, general and administrative costs (including corporate general and administrative expenses) increased $34.8 million for the year ended October 31, 2021 as compared to the prior year.

The increase was primarily attributed to a change in volume of our unconsolidated joint venture deliveries, and an increase in compensation expense.

The increase in compensation expense was mostly attributed to our long-term incentive programs now forecasted to achieve above target metrics as a result of improved operating results and our higher stock price.

Despite the increase in dollars, as a percentage of total revenue, such costs decreased to 9.9% for the year ended October 31, 2021 compared to 10.3% for the year ended October 31, 2020.

Pre-tax income increased to $189.9 million for the year ended October 31, 2021 from pre-tax income of $55.4 million for the year ended October 31, 2020.

Net income increased to $607.8 million for the year ended October 31, 2021 (which includes the benefit from the reduction in our deferred tax asset valuation allowance) from net income of $50.9 million for the year ended October 31, 2020.

Earnings per share, basic and diluted, increased to $87.50 and $85.86, respectively, for the year ended October 31, 2021, including the benefit from the reduction in our deferred tax asset valuation allowance, compared to earnings per share, basic and diluted of $7.48 and $7.03, respectively, for the year ended October 31, 2020.

Net contracts per average active selling community increased to 55.3 for the year ended October 31, 2021 compared to 54.3 in the prior year.

This strong absorption pace resulted in our average active selling communities at October 31, 2021 decreasing by 14.8% compared to 

October 31, 2020.

Net contracts decreased 13.4% for the year ended October 31, 2021, compared to the prior year, as a result of the decrease in average active selling communities.

Contract backlog decreased from 3,402 homes at October 31, 2020 to 3,247 homes at October 31, 2021.

However, the dollar value of contract backlog increased to $1.6 billion in connection with the increase in home prices discussed above, representing a 15.4% increase in dollar value compared to the prior year.

Despite the overall improvement during fiscal 2021, labor and material shortages that were initially due to the COVID-19 pandemic have worsened and continued despite resumption of pre-pandemic levels of economic activity while the full magnitude and duration of the COVID-19 pandemic and its effects remain unknown.

We may experience material declines in our net contracts, deliveries, revenues, cash flow and/or profitability during fiscal 2022 and beyond, compared to the corresponding prior-year periods.

Any such charges could be material to our consolidated financial statements.

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to “Land and land options held for future development or sale.”

As of October 31, 2020, the net book value associated with our 12 mothballed communities was $11.4 million, net of impairment charges recorded in prior periods of $122.2 million.

We regularly review communities to determine if mothballing is appropriate. During fiscal 2020, we did not mothball any additional communities, or sell any previously mothballed communities, but we re-activated one previously mothballed community and also re-activated a portion of one previously mothballed community.

As of October 31, 2021, the net book value associated with our 6 mothballed communities was $4.3 million, net of impairment charges recorded in prior periods of $57.5 million.

We regularly review communities to determine if mothballing is appropriate. During fiscal 2021, we did not mothball any additional communities, but we sold four previously mothballed communities and we re-activated two previously mothballed communities and portions of two previously mothballed communities.

We sell and lease back certain of our model homes with the right to participate in the potential profit when each home is sold to a third party at the end of the respective lease.

As a result of our continued involvement, for accounting purposes in accordance with ASC 606-10-55-68, these sale and leaseback transactions are considered a financing rather than a sale.

Therefore, for purposes of our Consolidated Balance Sheets, at October 31, 2020, inventory of $48.8 million was recorded to “Consolidated inventory not owned,”

with a corresponding amount of $47.2 million recorded to “Liabilities from inventory not owned.”

Therefore, for purposes of our Consolidated Balance Sheets, at October 31, 2021, inventory of $32.5 million was recorded to “Consolidated inventory not owned,”

with a corresponding amount of $31.5 million recorded to “Liabilities from inventory not owned.”

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However, if the undiscounted cash flows are less than the carrying amount, then the community is deemed impaired and is written down to its fair value.

We determine the estimated fair value of each community by determining the present value of its estimated future cash flows at a discount rate commensurate with the risk of the respective community, or in limited circumstances, prices for land in recent comparable sale transactions, market analysis studies, which include the estimated price a willing buyer would pay for the land (other than in a forced liquidation sale), and recent bona fide offers received from outside third parties. Our discount rates used for all impairments recorded from October 31, 2018 to October 31, 2020 ranged from 16.8% to 19.8%.

The estimated future cash flow assumptions are virtually the same for both our recoverability and fair value assessments.

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Inventories held for sale are land parcels ready for sale in their current condition, where we have decided not to build homes but are instead actively marketing for sale.

These land parcels represented $2.0 million of our total inventories at October 31, 2020, and are reported at the lower of carrying amount or fair value less costs to sell.

There were no inventories held for sale at October 31, 2019.

These land parcels represented $2.0 million of our total inventories at  October 31, 2020, and are reported at the lower of carrying amount or fair value less costs to sell.

There were no inventories held for sale at October 31, 2021.

In determining fair value for land held for sale, management considers, among other things, prices for land in recent comparable sale transactions, market analysis studies, which include the estimated price a willing buyer would pay for the land (other than in a forced liquidation sale) and recent bona fide offers received from outside third parties.

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This process requires significant management judgment and estimates.

During fiscal 2020, we did not write down any of our unconsolidated joint venture investments.

During fiscal 2019, we recorded a $0.9 million write down in our investment in one of our unconsolidated joint ventures in the West.

During fiscal 2021 and 2020, we did not write down any of our unconsolidated joint venture investments.

Warranty Costs and Construction Defect Reserves 

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See Note 16 to the Consolidated Financial Statements for additional information on the amount of warranty costs recognized in cost of goods sold and administrative expenses.

Deferred Income Taxes - Deferred income taxes are provided for temporary differences between amounts recorded for financial reporting and for income tax purposes.

If the combination of future years’

income (or loss) combined with the reversal of the timing differences results in a loss, such losses can be carried forward to future years to recover the deferred tax assets.

The Company evaluates all significant available positive and negative evidence, including the existence of losses in recent years and its forecast of future taxable income, in assessing the need for a valuation allowance.

The underlying assumptions the Company uses in forecasting future taxable income require significant judgment and take into account the Company's recent performance.

The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which temporary differences or carry-forwards are deductible or creditable.

A valuation allowance is provided to offset deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

In evaluating the exposures associated with our various tax filing positions, we recognize tax liabilities in accordance with ASC 740-10, for more likely than not exposures. We re-evaluate the exposures associated with our tax positions on a quarterly basis. This evaluation is based on factors such as changes in facts or circumstances, changes in tax law, new audit activity by taxing authorities, and effectively settled issues. Determining whether an uncertain tax position is effectively settled requires judgment. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision. A number of years may elapse before a particular matter for which we have established a liability is audited and fully resolved or clarified. We adjust our liability for unrecognized tax benefits and income tax provision in the period in which an uncertain tax position is effectively settled, or the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.

Due to the complexity of some of these uncertainties, the ultimate resolution may result in a liability that is materially different from our current estimate. Any such changes will be reflected as increases or decreases to income tax expense in the period in which they are determined.

Recent Accounting Pronouncements

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We have historically funded our homebuilding and financial services operations with cash flows from operating activities, borrowings under our credit facilities, the issuance of new debt and equity securities and other financing activities.

Due to covenant restrictions in our debt instruments, we are currently limited in the amount of debt we can incur that does not qualify as refinancing indebtedness (a limitation that we expect to continue for the foreseeable future), even if market conditions would otherwise be favorable, which could also impact our ability to grow our business. 

Due to covenant restrictions in our debt instruments, we are currently limited primarily in the amount of secured debt we can incur that does not qualify as refinancing indebtedness, even if market conditions, including then-current market available interest rates (in recent years, we have not been able to access the traditional capital and bank lending markets at competitive interest rates due to our highly leveraged capital structure), would otherwise be favorable, which could also impact our ability to grow our business. 

Operating, Investing and Financing Activities –

Our total liquidity at October 31, 2020 was $399.1 million, including $262.5 million in homebuilding cash and cash equivalents and $125.0 million of borrowing capacity under our senior secured revolving credit facility. This was above our target liquidity range of $170.0 to $245.0 million.

The unprecedented public health and governmental efforts to contain the COVID-19 pandemic have created significant uncertainty as to general economic and housing market conditions for fiscal 2021 and beyond.

We believe that these sources of cash together with available borrowings on our senior secured revolving credit facility will be sufficient through fiscal 2021 to finance our working capital requirements. 

We spent $624.2 million on land and land development during fiscal 2020.

After considering this land and land development and all other operating activities, including revenue received from deliveries, we had $292.8 million in cash provided from operations.

During fiscal 2020, cash provided by investing activities was $2.1 million, primarily due to distributions from existing unconsolidated joint ventures, partially offset by an investment in a new unconsolidated joint venture.

Cash used in financing activities was $167.8 million during fiscal 2020, which was primarily due to net payments made on our mortgage warehouse lines of credit, along with net payments for nonrecourse mortgage financings and also debt repurchases during the period. We intend to continue to use nonrecourse mortgage financings, model sale leaseback, joint ventures, and, subject to covenant restrictions in our debt instruments, land banking programs as our business needs dictate.

Our total liquidity at October 31, 2021 was $380.9 million, including $246.0 million in homebuilding cash and cash equivalents and $125.0 million of borrowing capacity under our senior secured revolving credit facility, after using $180.9 million for the full redemption of our 10.0% Senior Secured Notes due 2022 in the third quarter of fiscal 2021 and our 10.5% Senior Secured Notes due 2024 in the fourth quarter of fiscal 2021.

This was above our target liquidity range of $170.0 to $245.0 million.

We believe that these sources of cash together with available borrowings on our senior secured revolving credit facility will be sufficient through fiscal 2022 to finance our working capital requirements. 

We spent $698.3 million on land and land development during fiscal 2021.

After considering this land and land development and all other operating activities, including revenue received from deliveries, we had $210.2 million in cash provided from operations.

During fiscal 2021, cash provided by investing activities was $9.0 million, primarily due to distributions from existing unconsolidated joint ventures, partially offset by an investment in a new unconsolidated joint venture.

Cash used in financing activities was $217.3 million during fiscal 2021, which was primarily due to the full redemption of certain of our senior secured debt, as described above, along with net payments for nonrecourse mortgage financings, partially offset by net proceeds on our mortgage warehouse lines of credit. We intend to continue to use nonrecourse mortgage financings, model sale leaseback, joint ventures, and, subject to covenant restrictions in our debt instruments, land banking programs as our business needs dictate.

Our cash uses during the years ended October 31, 2021 and 2020 were for operating expenses, land purchases, land deposits, land development, construction spending, state income taxes, interest payments, financing transaction costs, debt repurchases, litigation matters and investments in unconsolidated joint ventures. During these periods, we provided for our cash requirements from available cash on hand, housing and land sales, financing transactions, model sale leasebacks, land banking transactions, unconsolidated joint ventures, financial service revenues and other revenues.

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Subtotal notes payable

Net discounts and premiums

Net (discounts) premiums

Net debt issuance costs

Total notes payable, net of discounts, premiums and debt issuance costs

(1) $26.0 million of 8.0% Senior Notes due 2027 are owned by a wholly-owned consolidated subsidiary of HEI.

(1) $26.0 million of 8.0% Senior Notes due 2027 (the "8.0% 2027 Notes") are owned by a wholly-owned consolidated subsidiary of HEI.

Therefore, in accordance with GAAP, such notes are not reflected on the Consolidated Balance Sheets of HEI.

On November 1, 2019, the maturity of the 8.0% Senior Notes was extended to November 1, 2027.

On November 1, 2019, the maturity of the 8.0% 2027 Notes was extended to November 1, 2027.

(2) At October 31, 2021, provides for up to $125.0 million in aggregate amount of senior secured first lien revolving loans.

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Except for K.

Hovnanian, the issuer of the notes and borrower under the Credit Facilities (as defined below), our home mortgage subsidiaries, certain of our title insurance subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures, we and each of our subsidiaries are guarantors of the Credit Facilities, the senior secured notes (except that certain of the Notes Guarantors (defined below) do not guarantee the 10.5% Senior Secured Notes due 2024 as discussed in Note 9 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K) and senior notes outstanding at October 31, 2020 (collectively, the “Notes Guarantors”).

The credit agreements governing the Credit Facilities and the indentures governing the senior secured and senior notes (together, the “Debt Instruments”) outstanding at October 31, 2020 do not contain any financial maintenance covenants, but do contain restrictive covenants that limit, among other things, the ability of HEI and certain of its subsidiaries, including K.

Hovnanian, to incur additional indebtedness (other than non-recourse indebtedness, certain permitted indebtedness and refinancing indebtedness), pay dividends and make distributions on common and preferred stock, repay certain indebtedness prior to its respective stated maturity, repurchase common and preferred stock, make other restricted payments (including investments), sell certain assets (including in certain land banking transactions), incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all of their assets and enter into certain transactions with affiliates.

Hovnanian at Sunrise Trail III, LLC, a wholly-owned subsidiary of the Company) (collectively, the “Notes Guarantors”).

The credit agreements governing the Credit Facilities and the indentures governing the senior secured and senior notes (together, the “Debt Instruments”) outstanding at October 31, 2021 do not contain any financial maintenance covenants, but do contain restrictive covenants that limit, among other things, the ability of HEI and certain of its subsidiaries, including K.

Hovnanian, to incur additional indebtedness (other than non-recourse indebtedness, certain permitted indebtedness and refinancing indebtedness), pay dividends and make distributions on common and preferred stock, repay certain indebtedness prior to its respective stated maturity, repurchase (including through exchanges) common and preferred stock, make other restricted payments (including investments), sell certain assets (including in certain land banking transactions), incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all of their assets and enter into certain transactions with affiliates.

The Debt Instruments also contain customary events of default which would permit the lenders or holders thereof to exercise remedies with respect to the collateral (as applicable), declare the loans made under the Unsecured Term Loan Facility (defined below) (the “Unsecured Term Loans”), loans made under the Secured Term Loan Facility (defined below) (the “Secured Term Loans”) and loans made under the Secured Credit Agreement (as defined below) (the “Secured Revolving Loans”) or notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the Unsecured Term Loans, Secured Term Loans, Secured Revolving Loans or notes or other material indebtedness, cross default to other material indebtedness, the failure to comply with agreements and covenants and specified events of bankruptcy and insolvency, with respect to the Unsecured Term Loans, Secured Term Loans and Secured Revolving Loans, material inaccuracy of representations and warranties and with respect to the Unsecured Term Loans, Secured Term Loans and Secured Revolving Loans, a change of control, and, with respect to the Secured Term Loans, Secured Revolving Loans and senior secured notes, the failure of the documents granting security for the obligations under the secured Debt Instruments to be in full force and effect, and the failure of the liens on any material portion of the collateral securing the obligations under the secured Debt Instruments to be valid and perfected.

As of October 31, 2021, we believe we were in compliance with the covenants of the Debt Instruments.

If our consolidated fixed charge coverage ratio is less than 2.0 to 1.0, as defined in the applicable Debt Instrument, we are restricted from making certain payments, including dividends, and from incurring indebtedness other than certain permitted indebtedness, refinancing indebtedness and nonrecourse indebtedness.

As a result of this ratio restriction, we are currently restricted from paying dividends (in the case of the payment of dividends on preferred stock, our secured debt leverage ratio must also be less than 4.0 to 1.0), which are not cumulative, on our 7.625% Series A Preferred Stock.

We anticipate that we will continue to be restricted from paying dividends for the foreseeable future.

Our inability to pay dividends is in accordance with covenant restrictions and will not result in a default under our Debt Instruments or otherwise affect compliance with any of the covenants contained in our Debt Instruments.

Under the terms of our Debt Instruments, we have the right to make certain redemptions and prepayments and, depending on market conditions and covenant restrictions, may do so from time to time.

We also continue to actively analyze and evaluate our capital structure and explore transactions to simplify our capital structure and to strengthen our balance sheet, including those that reduce leverage and/or extend maturities, and will seek to do so with the right opportunity.

We may also continue to make debt purchases and/or exchanges for debt or equity from time to time through tender offers, exchange offers, open market purchases, private transactions, or otherwise, or seek to raise additional debt or equity capital, depending on market conditions and covenant restrictions.

If our consolidated fixed charge coverage ratio is less than 2.0 to 1.0, as defined in the applicable Debt Instrument, we are restricted from making certain payments and dividends (in such case our secured debt leverage ratio must also be less than 4.0 to 1.0), and from incurring indebtedness other than certain permitted indebtedness, refinancing indebtedness and nonrecourse indebtedness.

As of October 31, 2021, as a result of our improved operating results, our fixed coverage ratio is above 2.0 to 1.0 and our secured debt leverage ratio is below 4.0 to 1.0, therefore we are no longer restricted from paying dividends.

As such, on December 3, 2021, our Board of Directors authorized a dividend payment to preferred shareholders of record on January 1, 2022 and which will be paid on January 15, 2022.

Under the terms of our Debt Instruments, we have the right to make certain redemptions and prepayments and, depending on market conditions, our strategic priorities and covenant restrictions, may do so from time to time.

We also continue to actively analyze and evaluate our capital structure and explore transactions to simplify our capital structure and to strengthen our balance sheet, including those that reduce leverage, interest rates and/or extend maturities, and will seek to do so with the right opportunity.

We may also continue to make debt purchases and/or exchanges for debt or equity from time to time through tender offers, exchange offers, redemptions, open market purchases, private transactions, or otherwise, or seek to raise additional debt or equity capital, depending on market conditions and covenant restrictions.

Any liquidity-enhancing or other capital raising or refinancing transaction will depend on identifying counterparties, negotiation of documentation and applicable closing conditions and any required approvals.

Due to covenant restrictions in our Debt Instruments, we are currently limited in the amount of debt we can incur that does not qualify as refinancing indebtedness (a limitation that we expect to continue for the foreseeable future), even if market conditions would otherwise be favorable, which could also impact our ability to grow our business.

Due to covenant restrictions in our Debt Instruments, we are currently limited in the amount of debt we can incur that does not qualify as refinancing indebtedness, even if market conditions, including then-current market available interest rates (in recent years, we have not been able to access the traditional capital and bank lending markets at competitive interest rates due to our highly leveraged capital structure), would otherwise be favorable, which could also impact our ability to grow our business.

See Note 9 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a further discussion of K.

Hovnanian’s Credit Facilities, senior secured notes and senior notes.

Hovnanian’s Credit Facilities, senior secured notes and senior notes, including information with respect to the collateral securing our Debt Instruments.

Mortgages and Notes Payable

We have nonrecourse mortgage loans for certain communities totaling $135.1 million and $203.6 million (net of debt issuance costs) at October 31, 2020 and October 31, 2019, respectively, which are secured by the related real property, including any improvements, with an aggregate book value of $368.1 million and $410.2 million, respectively.

We have nonrecourse mortgage loans for certain communities totaling $125.1 million and $135.1 million (net of debt issuance costs) at October 31, 2021 and October 31, 2020, respectively, which are secured by the related real property, including any improvements, with an aggregate book value of $448.5 million and $368.1 million, respectively.

The weighted-average interest rate on these obligations was 4.4% and 6.4% at October 31, 2021 and October 31, 2020, respectively, and the mortgage loan payments on each community primarily correspond to home deliveries.

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In certain instances, we retain the servicing rights for a small amount of loans.

The loans are secured by the mortgages held for sale and repaid when we sell the underlying mortgage loans to permanent investors. As of October 31, 2020 and 2019, we had an aggregate of $87.2 million and $140.2 million, respectively, outstanding under several of K.

Hovnanian Mortgage finances the origination of mortgage loans through various master repurchase agreements, which are recorded in “Financial services”

liabilities on the Consolidated Balance Sheets.

The loans are secured by the mortgages held for sale and are repaid when we sell the underlying mortgage loans to permanent investors. As of October 31, 2021 and 2020, we had an aggregate of $134.9 million and $87.2 million, respectively, outstanding under several of K.

Hovnanian Mortgage’s short-term borrowing facilities.

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In fiscal 2021, 2020 and 2019, we did not make any dividend payments on the Series A Preferred Stock as a result of covenant restrictions in our debt instruments.

Certain debt instruments to which we are a party contain restrictions on the payment of cash dividends.

As a result of the most restrictive of these provisions, we are not currently able to pay any cash dividends.

We have never paid a cash dividend to common stockholders.

We anticipate that we will continue to be restricted from paying dividends, which are not cumulative, for the foreseeable future. 

On October 31, 2019, in connection with the issuance of the 7.75% Senior Secured 1.25 Lien Notes due 2026, we issued and sold an aggregate of 178,427 shares of Class A Common Stock, par value $0.01 per share (and associated Preferred Stock Purchase Rights), to the purchasers of such Notes for an aggregate purchase price of $1,784.27.

Due to our improved operating results, as of October 31, 2021 we are no longer restricted from making dividend payments under our debt instruments.

On December 3, 2021, our Board of Directors authorized a dividend payment of $2.7 million to preferred shareholders of record on January 1, 2022 and which will be paid on January 15, 2022.

On October 31, 2019, in connection with the issuance of the 7.75% Senior Secured 1.25 Lien Notes due 2026, we issued and sold an aggregate of 178,427 shares of Class A Common Stock, par value $0.01 per share (and associated Preferred Stock Purchase Rights), to the purchasers of such Notes for an aggregate purchase price of $1,784.27.

The issuance was exempt from registration under Section 4(a)(2) of the Securities Act of 1933.

Unconsolidated Joint Ventures  

As discussed in Note 20 –

Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements, we have investments in unconsolidated joint ventures in various markets where our homebuilding operations are located.

Our unconsolidated joint ventures had total combined assets of $611.8 million at October 31, 2021 and $540.2 million at October 31, 2020.

Our investments in unconsolidated joint ventures totaled $60.9 million at October 31, 2021 and $103.2 million at October 31, 2020.

As of October 31, 2021 and 2020, our unconsolidated joint ventures had outstanding debt totaling $74.0 and $117.2 million, respectively, under separate construction loan agreements with different third-party lenders and affiliates of certain investment partners to finance their respective land development activities, with the outstanding debt secured by the corresponding underlying property and related project assets and non-recourse to us.

While we and our unconsolidated joint venture partners provide certain guarantees and indemnities to the lender, we do not have a guaranty or any other obligation to repay our outstanding debt or to support the value of the collateral underlying the outstanding debt.

We do not believe that our existing exposure under our guaranty and indemnity obligations related to the outstanding debt is material to our consolidated financial statements.

See also Note 19 –

Variable Interest Entities in the Notes to Consolidated Financial Statements.

We determined that none of our joint ventures at October 31, 2021 and 2020 were a variable interest entity.

All our unconsolidated joint ventures were accounted for under the equity method because we did not have a controlling financial interest.

Inventory Activities

Total inventory, excluding consolidated inventory not owned, decreased $88.7 million during the year ended October 31, 2020, from October 31, 2019. Total inventory, excluding consolidated inventory not owned, decreased in the Northeast by $24.8 million, in the Midwest by $2.6 million, in the Southeast by $44.0 million, and in the West by $33.5 million. These decreases were partially offset by increases in the Mid-Atlantic of $2.7 million and in the Southwest of $13.5 million.

These inventory fluctuations were primarily attributable to home deliveries and land sales during the period, partially offset by new land purchases and land development.

During the year ended October 31, 2020, we had aggregate impairments in the amount of $2.0 million. We wrote-off costs in the aggregate amount of $6.8 million during the year ended October 31, 2020 related to land options that expired or that we terminated, as the communities’

Total inventory, excluding consolidated inventory not owned, increased $142.0 million during the year ended October 31, 2021, from October 31, 2020. Total inventory, excluding consolidated inventory not owned, increased in the Northeast by $35.9 million, in the Midwest by $2.9 million, in the Southeast by $41.9 million and in the Southwest by $91.0 million.

These increases were partially offset by decreases in the Mid-Atlantic of $5.0 million and in the West of $24.7 million.

These inventory fluctuations were primarily attributable to new land purchases and land development, partially offset by home deliveries and land sales during the period.

During the year ended October 31, 2021, we had aggregate impairments in the amount of $2.0 million. We wrote-off costs in the aggregate amount of $1.6 million during the year ended October 31, 2021 related to land options that expired or that we terminated, as the communities’

forecasted profitability was not projected to produce adequate returns on investment commensurate with the risk. In the last few years, we have been able to acquire new land parcels at prices that we believe will generate reasonable returns under current homebuilding market conditions.

This trend may not continue in either the near or the long term. Substantially all homes under construction or completed and included in inventory at October 31, 2021 are expected to be closed during the next six to nine months.  

Consolidated inventory not owned decreased $8.1 million.

Consolidated inventory not owned decreased $83.5 million.

Consolidated inventory not owned consists of options related to land banking and model financing transactions that were added to our Consolidated Balance Sheets in accordance with US GAAP. The decrease from October 31, 2020 to October 31, 2021 was primarily due to a decrease in land banking transactions along with a decrease in the sale and leaseback of certain model homes during the period.

We have land banking arrangements, whereby we sell land parcels to the land bankers and they provide us an option to purchase back finished lots on a predetermined schedule. Because of our options to repurchase these parcels, for accounting purposes in accordance with ASC 606-10-55-70, these transactions are considered a financing rather than a sale. For purposes of our Consolidated Balance Sheet, at October 31, 2020, inventory of $133.4 million was recorded to “Consolidated inventory not owned,”

with a corresponding amount of $84.0 million (net of debt issuance costs) recorded to “Liabilities from inventory not owned”

We have land banking arrangements, whereby we sell land parcels to the land bankers and they provide us an option to purchase back finished lots on a predetermined schedule. Because of our options to repurchase these parcels, for accounting purposes in accordance with ASC 606-10-55-70, these transactions are considered a financing rather than a sale. For purposes of our Consolidated Balance Sheet, at October 31, 2021, inventory of $66.2 million was recorded to “Consolidated inventory not owned,”

with a corresponding amount of $31.3 million (net of debt issuance costs) recorded to “Liabilities from inventory not owned”

for the amount of net cash received from the transactions.

In addition, we sell and lease back certain of our model homes with the right to participate in the potential profit when each home is sold to a third party at the end of the respective lease. As a result of our continued involvement, for accounting purposes in accordance with ASC 606-10-55-68, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our Consolidated Balance Sheet, at October 31, 2020, inventory of $48.8 million was recorded to “Consolidated inventory not owned,”

with a corresponding amount of $47.2 million (net of debt issuance costs) recorded to “Liabilities from inventory not owned”

In addition, we sell and lease back certain of our model homes with the right to participate in the potential profit when each home is sold to a third party at the end of the respective lease. As a result of our continued involvement, for accounting purposes in accordance with ASC 606-10-55-68, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our Consolidated Balance Sheet, at October 31, 2021, inventory of $32.5 million was recorded to “Consolidated inventory not owned,”

with a corresponding amount of $31.5 million (net of debt issuance costs) recorded to “Liabilities from inventory not owned”

for the amount of net cash received from the transactions.

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Also included in “Land and land options held for future development or sale” are amounts associated with inventory in mothballed communities. We mothball (or stop development on) certain communities when we determine the current performance does not justify further investment at the time. That is, we believe we will generate higher returns if we decide against spending money to improve land today and save the raw land until such time as the markets improve or we determine to sell the property. As of October 31, 2021, we had mothballed land in 6 communities. The book value associated with these communities at October 31, 2021 was $4.3 million, which was net of impairment charges recorded in prior periods of $57.5 million. We continually review communities to determine if mothballing is appropriate.

During fiscal 2020, we did not mothball any additional communities, or sell any previously mothballed communities, but we re-activated one previously mothballed community and also re-activated a portion of one previously mothballed community.

Inventories held for sale, which are land parcels where we have decided not to build homes, and are actively marketing the land for sale, represented $2.0 million of our total inventories held for sale at October 31, 2020 and are reported at the lower of carrying amount or fair value less costs to sell.

There were no inventories held for sale at October 31, 2019. In determining fair value for land held for sale, management considers, among other things, prices for land in recent comparable sale transactions, market analysis studies, which include the estimated price a willing buyer would pay for the land (other than in a forced liquidation sale) and recent bona fide offers received from outside third parties.

During fiscal 2021, we did not mothball any additional communities, but we sold four 

previously mothballed communities and we re-activated two previously mothballed communities and portions of two previously mothballed communities.

Inventories held for sale, which are land parcels where we have decided not to build homes, and are actively marketing the land for sale, represented $2.0 million of our total inventories held for sale at October 31, 2020 and are reported at the lower of carrying amount or fair value less costs to sell.

There were no inventories held for sale at October 31, 2021. In determining fair value for land held for sale, management considers, among other things, prices for land in recent comparable sale transactions, market analysis studies, which include the estimated price a willing buyer would pay for the land (other than in a forced liquidation sale) and recent bona fide offers received from outside third parties.

In the ordinary course of business, we enter into land and lot option purchase contracts in order to procure land or lots for the construction of homes.

Lot option contracts enable us to control significant lot positions with a minimal capital investment and substantially reduce the risks associated with land ownership and development.

At October 31, 2021, we had total cash deposits of $100.1 million to purchase land and lots with a total purchase price of $1.5 billion.

Our financial exposure is generally limited to forfeiture of the nonrefundable deposits, letters of credit and other nonrefundable amounts incurred.

We have no material third-party guarantees.

The following tables summarize home sites included in our total residential real estate. 

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The following table summarizes our started or completed unsold homes and models, excluding unconsolidated joint ventures, in active and substantially completed communities.

The decrease in the total homes from October 31, 2019 to October 31, 2020 was primarily due to the increase in net contracts absorption pace during the latter half of fiscal 2020. 

The decrease in the total homes from October 31, 2020 to October 31, 2021 was primarily due to the increase in net contracts absorption pace during fiscal 2021. 

October 31, 2021

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Other Balance Sheet Activities

Homebuilding –

Restricted cash and cash equivalents decreased $6.2 million from October 31, 2019 to $14.7 million at October 31, 2020.

The decrease was primarily due to a reduction in cash collateral of our stand-alone letters of credit during the period.

Investments in and advances to unconsolidated joint ventures decreased $23.9 million during the fiscal year ended October 31, 2020 compared to October 31, 2019.

The decrease was primarily due to unconsolidated joint venture partner distributions during fiscal 2020, partially offset by new capital contributions for existing joint ventures and the formation of a new joint venture during fiscal 2020.

As of October 31, 2020 and October 31, 2019, we had investments in ten unconsolidated homebuilding joint ventures and one unconsolidated land development joint venture for both periods.

Investments in and advances to unconsolidated joint ventures decreased $42.3 million during the fiscal year ended October 31, 2021 compared to October 31, 2020.

The decrease was primarily due to partnership distributions during the period, along with our purchase of the remaining equity interest in one of our unconsolidated joint ventures in the third quarter of fiscal 2021.

As a result of this transaction, we took control of four communities, including three active communities.

The previously unconsolidated joint venture was subsequently dissolved.

Additionally, in the fourth quarter of fiscal 2021 we acquired the remaining assets and liabilities from one of our unconsolidated joint ventures which was disolved during the period, resulting in the write-off of our investment.

These decreases were partially offset by an increase due to our entry into two new unconsolidated joint ventures during the first half of fiscal 2021.

As of October 31, 2021 and October 31, 2020, we had investments in nine and ten unconsolidated homebuilding joint ventures, respectively, and one unconsolidated land development joint venture for both periods.

We have no guarantees associated with our unconsolidated joint ventures, other than guarantees limited only to performance and completion of development, environmental indemnification and standard warranty and representation against fraud, misrepresentation and similar actions, including a voluntary bankruptcy.

Receivables, deposits and notes, net decreased $11.2 million from October 31, 2019 to $33.7 million at October 31, 2020. The decrease was primarily due to the timing of home closings, along with the receipt of a receivable during the first quarter of fiscal 2020 related to the funding of the satisfaction and discharge of certain of our senior secured notes in the fourth quarter of fiscal 2019. 

Receivables, deposits and notes, net increased $6.2 million from October 31, 2020 to $39.9 million at October 31, 2021. The increase was primarily due to the timing of home closings, along with increased escrow and municipal deposits during the period, partially offset by a receivable for a settlement which was received in the third quarter of fiscal 2021.

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Lease right of use asset

Prepaid insurance increased slightly due to the timing of premium payments.

Prepaid insurance decreased slightly due to the timing of premium payments.

These costs are amortized over the life of the associated insurance policy, which can be one to three years.

Prepaid project costs consist of community specific expenditures that are used over the life of the community. Such prepaids are expensed as homes are delivered. The decrease in prepaid project costs is directly related to our decreased community count, resulting from delivering homes and closing out of communities at a faster pace than opening new communities during the year.

Other prepaids decreased primarily due to the amortization of deferred financing costs and costs for certain software and related services during the period.

Lease right of use asset represents the net present value of our operating leases which, in connection with the Company’s adoption of ASU 2016-02 on November 1, 2019, are now required to be recorded as an asset on our Consolidated Balance Sheets.

Prepaid project costs consist of community specific expenditures that are used over the life of the community. Such prepaids are expensed as homes are delivered. The decrease in prepaid project costs was primarily related to the close-out of communities during the fiscal year, along with the write-off of prepaid costs related to a land sale in the Midwest, partially offset by prepaid project costs for new communities during the fiscal year.

Other prepaids increased primarily due to increased prepaid commissions and property taxes during the period.

Lease right of use asset represents the net present value of our operating leases which, in accordance with ASC 842, are required to be recorded as an asset on our Consolidated Balance Sheets.

See Note 4 to the Consolidated Financial Statements for further information.

Financial services assets consist primarily of residential mortgages receivable held for sale of which $101.8 million and $163.0 million at October 31, 2020 and 2019, respectively, were being temporarily warehoused and are awaiting sale in the secondary mortgage market. The decrease in mortgage loans held for sale from October 31, 2019 was primarily related to a decrease in the volume of loans originated during the fourth quarter of fiscal 2020 compared to the fourth quarter of fiscal 2019, partially offset by an increase in the average loan value.

Nonrecourse mortgages secured by inventory decreased to $135.1 million at October 31, 2020, from $203.6 million at October 31, 2019.

Financial services assets consist primarily of residential mortgages receivable held for sale of which $149.2 million and $101.8 million at October 31, 2021 and 2020, respectively, were being temporarily warehoused and are awaiting sale in the secondary mortgage market. The increase in mortgage loans held for sale from October 31, 2020 was primarily related to an increase in the volume of loans originated during the fourth quarter of fiscal 2021 compared to the fourth quarter of fiscal 2020, along with an increase in the average loan value.

Deferred tax assets, net, was $425.7 million at October 31, 2021, and zero at October 31, 2020, due to the full reversal of our federal valuation allowance and the reversal of a portion of our state valuation allowance in the second quarter of fiscal 2021.

Nonrecourse mortgages secured by inventory decreased to $125.1 million at October 31, 2021, from $135.1 million at October 31, 2020.

The decrease was primarily due to the payment of existing mortgages, partially offset by additional loan borrowings on existing mortgages along with new mortgages for communities in most of our segments obtained during fiscal 2021.

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Other liabilities

The increase in accounts payable was primarily due to an increase in construction spending in the fourth quarter of fiscal 2020 as compared to the fourth quarter of fiscal 2019, and a corresponding increase in backlog at October 31, 2020 from October 31, 2019.

Reserves decreased during the period, primarily due to a reduction in our construction defect reserves in connection with our annual assessment as our loss experience has continued to improve over the past few years.

Lease liability represents the net present value of our minimum lease obligations, which as discussed above, are required to be recorded on our Consolidated Balance Sheets as a result of the Company’s adoption of ASU 2016-02 on November 1, 2019.

Accrued expenses decreased primarily due to accruals for legal fees associated with debt financing transactions accrued at October 31, 2019 and paid in the first quarter of fiscal 2020.

Accrued compensation increased primarily due to increased bonuses related to increased profitability in fiscal 2020 as compared to fiscal 2019.

Other liabilities increased primarily due to deferred payroll tax withholdings, partially offset by the transfer of a municipal loan from a previously consolidated community to a new unconsolidated joint venture formed in the first quarter of fiscal 2020.

The increase in accounts payable was primarily due to an increase in construction spending, corresponding to the increase in deliveries in the fourth quarter of fiscal 2021 as compared to the fourth quarter of fiscal 2020.

Reserves increased due to new accruals primarily for warranty and construction defect claims, partially offset by claim payments during the period. Lease liability represents the net present value of our minimum lease obligations, which as discussed above, are required to be recorded on our Consolidated Balance Sheets in accordance with ASC 842.

Accrued expenses increased primarily due to an accrual for a sales reward program, along with an increase in accrued property taxes.

The increase in accrued compensation was primarily due to expenses associated with our 2019 LTIP plan based on the increase in our stock price during fiscal 2021, along with increased company profitability in fiscal 2021 as compared to fiscal 2020, which resulted in higher bonuses.

Other liabilities increased primarily due to deferred payroll tax withholdings during the period.

Customers’

deposits increased $12.4 million from October 31, 2019 to $48.3 million at October 31, 2020.

The increase was primarily related to the increase in backlog during the year.

Liabilities from inventory not owned decreased $9.8 million to $131.2 million at October 31, 2020.

deposits increased $20.0 million from October 31, 2020 to $68.3 million at October 31, 2021.

The increase was primarily related to the increase in the dollar value of our backlog, associated with price increases in fiscal 2021, along with an increase due to the consolidation of one of our previously unconsolidated joint ventures during fiscal 2021, which has open for sale communities.

Liabilities from inventory not owned decreased $68.4 million to $62.8 million at October 31, 2021.

The decrease was due to a decrease in land banking transactions during the period, along with a decrease in the sale and leaseback of certain model homes, both of which are accounted for as financing transactions as described above.

Accrued interest increased $16.5 million to $35.6 million at October 31, 2020.

The increase was primarily due to the timing of new accruals as a result of the financing transactions completed in October 2019, partially offset by payments during the year, along with slightly higher interest rates on our new senior secured notes issued in our financing transactions in fiscal 2020. 

Financial Services (liabilities) decreased $50.1 million from $169.1 million at October 31, 2019, to $119.0 million at October 31, 2020.

The decrease was primarily due to a decrease in amounts outstanding under our mortgage warehouse lines of credit, and directly correlated to the decrease in the volume of mortgage loans held for sale during the year.

Accrued interest decreased $7.4 million to $28.2 million at October 31, 2021.

The decrease was primarily due to the redemption of our 10.0% Senior Secured Notes due 2022 and 10.5% Senior Secured Notes due 2024 during the period, partially offset by new accruals during the period.

Financial Services liabilities increased $63.2 million from $119.0 million at October 31, 2020, to $182.2 million at October 31, 2021.

The increase was primarily due to the increase in amounts outstanding under our mortgage warehouse lines of credit, and directly correlated to the increase in the volume of mortgage loans held for sale during the year.

Results of Operations

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Total revenues percent change

Sale of homes revenues increased $302.3 million, or 15.5%, for the year ended October 31, 2020, increased $43.5 million, or 2.3%, for the year ended October 31, 2019, and decreased $433.8 million, or 18.5%, for the year ended October 31, 2018 as compared to the same period of the prior year.

The increased revenues in fiscal 2020 were primarily due to the number of home deliveries increasing 15.0%, and the average price per home increasing to $396,065 in fiscal 2020 from $394,194 in fiscal 2019.

The increase in deliveries in fiscal 2020 was primarily due to increased demand for new home construction during the latter half of fiscal 2020.

The increased revenues in fiscal 2019 were primarily due to the number of home deliveries increasing 2.0% and the average price per home increasing to $394,194 in fiscal 2019 from $393,280 in fiscal 2018.

The increase in deliveries in fiscal 2019 was primarily due to the result of an increase in community count in fiscal 2019 as compared to fiscal 2018 of 14.6%.

The decreased revenues in fiscal 2018 were primarily due to the number of home deliveries decreasing 13.5% and the average price per home decreasing to $393,280 in fiscal 2018 from $417,714 in fiscal 2017.

The decrease in fiscal 2018 deliveries was primarily the result of a reduction in community count of 5.4%.

The fluctuations in average prices for fiscal 2020, 2019, and 2018 were primarily the result of geographic and community mix of our deliveries.

For fiscal 2018, there were also home price decreases (which we increase or decrease in communities depending on the respective community’s performance), partially offset by price increases in some communities primarily in the West.

Sale of homes revenues increased $421.7 million, or 18.7%, for the year ended October 31, 2021, increased $302.3 million, or 15.5%, for the year ended October 31, 2020, and increased $43.5 million, or 2.3%, for the year ended October 31, 2019 as compared to the same period of the prior year.

The increased revenues in fiscal 2021 were primarily due to the number of home deliveries increasing 9.1%, and the average price per home increasing to $430,966 in fiscal 2021 from $396,065 in fiscal 2020.

The increase in deliveries in fiscal 2021 was primarily due to increased demand for new home construction during fiscal 2021.

The increased revenues in fiscal 2020 were primarily due to the number of home deliveries increasing 15.0%, and the average price per home increasing to $396,065 in fiscal 2020 from $394,194 in fiscal 2019.

The increase in deliveries in fiscal 2020 was primarily due to the increased demand for new home construction during the latter half of fiscal 2020.

The increased revenues in fiscal 2019 were primarily due to the number of home deliveries increasing 2.0% and the average price per home increasing to $394,194 in fiscal 2019 from $393,280 in fiscal 2018.

The increase in deliveries in fiscal 2019 was primarily due to the result of an increase in community count in fiscal 2019 as compared to fiscal 2018 of 14.6%.

The increase in average price in fiscal 2021 and 2020 was primarily due to price increases in most of our communities as a result of a sustained surge in demand for new homes, which started in May 2020.

The increase in average price for fiscal 2019 was primarily the result of geographic and community mix of our deliveries.

For further detail on changes in segment revenues see “Homebuilding Operations by Segment”

During the latter half of fiscal 2020, we saw an increase in demand for new home construction and, as a result, were able to increase home prices in virtually all of our markets.

below. Land sales are ancillary to our homebuilding operations and are expected to continue in the future but may significantly fluctuate up or down.

For further detail on land sales and other revenue, see the section titled “Land Sales and Other Revenues”

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See Note 20 to the Consolidated Financial Statements for a further discussion of our joint ventures.

The increase in housing revenues during the year ended October 31, 2021, as compared to the year ended October 31, 2020, was primarily attributed to our increased deliveries, from the sustained strong homebuilding market and high demand for new home construction we saw begin in fiscal 2020, and by the increase in average sales price.

Housing revenues in fiscal 2021 increased 18.7% on a combined basis across all of our homebuilding segments, and average sales price increased by 8.8% in all such segments combined, excluding unconsolidated joint ventures.

In our homebuilding segments, homes delivered increased in fiscal 2021 as compared to fiscal 2020 by 12.5%, 6.3%, 9.9%, 13.3% and 16.1% in the Mid-Atlantic, Midwest, Southeast, Southwest and West, respectively, partially offset by a 42.2% decrease in the Northeast. Overall in fiscal 2021 as compared to fiscal 2020, homes delivered increased 9.1% across all our segments, excluding unconsolidated joint ventures.

The increase in housing revenues during the year ended October 31, 2020, as compared to the year ended October 31, 2019, was primarily attributed to our increased deliveries, from the strong homebuilding market and high demand for new home construction, and by the increase in average sales price.

Housing revenues in fiscal 2020 increased 15.5% on a combined basis across all of our homebuilding segments, and average sales price increased by 0.5% in all such segments combined, excluding unconsolidated joint ventures.

In our homebuilding segments, homes delivered increased in fiscal 2020 as compared to fiscal 2019 by 81.3%, 15.8%, 6.9%, 0.6%, 19.7% and 6.3% in the Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West, respectively. Overall in fiscal 2020 as compared to fiscal 2019, homes delivered increased 15.0% across all our segments, excluding unconsolidated joint ventures.

The increase in housing revenues during the year ended October 31, 2019, as compared to the year ended October 31, 2018, was primarily attributed to our increased deliveries, as our community count increased year over year, and due to the increase in average sales price.

Housing revenues in fiscal 2019 increased 2.3% on a combined basis across all of our homebuilding segments, and average sales price increased by 0.2%, excluding unconsolidated joint ventures.

In our homebuilding segments, homes delivered increased in fiscal 2019 as compared to fiscal 2018 by 7.9%, 2.7% and 16.7% in the Northeast, Midwest and West, respectively, and decreased by 3.0%, 8.6% and 0.4% in the Mid-Atlantic, Southeast and Southwest, respectively. Overall in fiscal 2019 as compared to fiscal 2018 homes delivered increased 2.0% across all our segments, excluding unconsolidated joint ventures.

Quarterly housing revenues and net sales contracts by segment, excluding unconsolidated joint ventures, for the years ended October 31, 2020, 2019 and 2018 are set forth below (net contracts are defined as new contracts executed during the period for the purchase of homes, less cancellations of contracts in the same period):

Housing revenues in fiscal 2020 increased 15.5% on a combined basis across all of our homebuilding segments, and average sales price increased by 0.5% in all such segments combined, excluding unconsolidated joint ventures.

Overall in fiscal 2020 as compared to fiscal 2019, homes delivered increased 15.0% across all of our segments, excluding unconsolidated joint ventures.  

Quarterly housing revenues and net sales contracts by segment, excluding unconsolidated joint ventures, for the years ended October 31, 2021, 2020 and 2019 are set forth below (net contracts are defined as new contracts executed during the period for the purchase of homes, less cancellations of contracts in the same period):

Quarter Ended

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Consolidated total

Contracts per average active selling community in fiscal 2020 were 54.3 compared to 39.0 in fiscal 2019.

Contracts per average active selling community in fiscal 2021 were 55.3 compared to 54.3 in fiscal 2020.

Our reported level of sales contracts (net of cancellations) was positively impacted by an increase in the pace of sales in all of the Company’s segments during fiscal 2021. Cancellation rates represent the number of cancelled contracts in the quarter divided by the number of gross sales contracts executed in the quarter.

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Most cancellations occur within the legal rescission period, which varies by state but is generally less than two weeks after the signing of the contract.

Cancellations also occur as a result of a buyer's failure to qualify for a mortgage, which generally occurs during the first few weeks after signing. As shown in the tables above, contract cancellations over the past several years have been within what we believe to be a normal range, although in the second quarter of fiscal 2020 the number of contract cancellations increased and gross sales contracts decreased due to the COVID-19 pandemic.

However, in the third quarter of fiscal 2020, contract cancellations as a percentage of gross sales contracts decreased as gross sales rebounded and were very strong during the period.

In the third quarter of fiscal 2020, contract cancellations as a percentage of beginning backlog increased further, primarily due to a lower beginning backlog as a result of lower gross sales contracts in the second quarter of fiscal 2020.

In the fourth quarter of fiscal 2020, contract cancellations decreased back to more normalized levels due to the increase in beginning backlog in the third quarter as a result of strong gross sales during the period.

Market conditions and further impacts from COVID-19 remain uncertain, and it is difficult to predict what cancellation rates will be in the future.

Cancellations also occur as a result of a buyer's failure to qualify for a mortgage, which generally occurs during the first few weeks after signing. As shown in the tables above, contract cancellations over the past several years have been within what we believe to be a normal range, with fiscal 2021 cancellation rates, in particular, being below historical norms as a result of the strong market conditions.

Fiscal 2020 had varying cancellation rates due to the COVID-19 pandemic and its effects.

Market conditions and any possible further impacts from COVID-19 remain uncertain, and it is difficult to predict what cancellation rates will be in the future.

An important indicator of our future results is recently signed contracts and our home contract backlog for future deliveries.

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Number of homes

Contract backlog as of October 31, 2019 excludes 29 homes that were sold to one of our joint ventures at the time of the joint venture formation.

Contract backlog dollars increased 61.3% as of October 31, 2020 compared to October 31, 2019, and the number of homes in backlog increased 55.3% for the same period.

The increase in backlog was driven by a 30.2% increase in net contracts, despite a decrease in community count for the year ended October 31, 2020 compared to the prior fiscal year.

In the second half of fiscal 2020, we experienced an increase in our sales pace due to high demand for new home construction, which has resulted in our highest sales pace in over a decade.

In the month of November 2020, excluding unconsolidated joint ventures, we signed an additional 493 net contracts amounting to $216.7 million in contract value.

Contract backlog as of October 31, 2019 excludes 29 homes that were sold to one of our joint ventures at the time of the joint venture formation.

Reflects the reclassification of 14 homes and $7.4 million of contract backlog as of October 31, 2021 from unconsolidated joint ventures to the consolidated Mid-Atlantic segment.

This is related to our acquisition of the remaining assets and liabilities from one of our unconsolidated joint ventures which was dissolved during the fourth quarter of fiscal 2021.

Contract backlog dollars increased 15.4% as of October 31, 2021 compared to October 31, 2020, and the number of homes in backlog decreased 4.6% for the same period.

The increase in backlog dollars was driven by a 20.9% increase in the average price of the homes in backlog for the year ended October 31, 2021 compared to the prior fiscal year.

In the month of November 2021, excluding unconsolidated joint ventures, we signed an additional 467 net contracts amounting to $239.7 million in contract value.

Total cost of sales on our Consolidated Statements of Operations includes expenses for consolidated housing and land and lot sales, including inventory impairment loss and land option write-offs (defined as “land charges”

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We sell a variety of home types in various communities, each yielding a different gross margin. As a result, depending on the mix of communities delivering homes, consolidated gross margin may fluctuate up or down.

Total homebuilding gross margin percentage increased to 14.7% for the year ended October 31, 2020 compared to 14.2% for the prior year.

This increase was primarily due to the mix of communities delivering compared to the prior year, along with increases in home prices in virtually all of our markets.

Due to significantly increased demand in June and July of 2020, we began increasing home prices.

We believe that these price increases should offset potential material and labor cost increases related to increased demand and could also result in improved gross margin as a percentage of revenues in future quarters. Total homebuilding gross margin percentage decreased to 14.2% for the year ended October 31, 2019 compared to 15.2% for the prior year.

This decrease was primarily due to the increase in cost of sales interest as a result of changes in estimates of interest per home for deliveries during fiscal 2019 in connection with our semi-annual community life planning process, along with a decrease due to the mix of communities delivering in each period. Also contributing to the decrease is the mix of communities delivering compared to the same period of the prior year, along with a slight increase in direct costs and financing concessions.

Reflected as inventory impairment loss and land option write-offs in cost of sales (“land charges”), we have written off or written down certain inventories totaling $8.8 million, $6.3 million and $3.5 million during the years ended October 31, 2020, 2019 and 2018, respectively, to their estimated fair value.

Total homebuilding gross margin percentage increased to 18.6% for the year ended October 31, 2021 compared to 14.7% for the prior year.

This increase was primarily due to increases in home prices across virtually all our operating segments, along with the mix of communities delivering compared to the prior year.

Total homebuilding gross margin percentage increased to 14.7% for the year ended October 31, 2020 compared to 14.2% for the prior year.

This increase was primarily due to the mix of communities delivering compared to the prior year, along with increases in home prices during the latter half of fiscal 2020 in virtually all of our markets.

Reflected as inventory impairment loss and land option write-offs in cost of sales (“land charges”), we have written off or written down certain inventories totaling $3.6 million, $8.8 million and $6.3 million during the years ended October 31, 2021, 2020 and 2019, respectively, to their estimated fair value.

See Note 12 to the Consolidated Financial Statements for an additional discussion.

During the years ended October 31, 2020, 2019 and 2018, we wrote off residential land options and approval and engineering costs totaling $6.8 million, $3.6 million and $1.4 million, respectively, which are included in the total land charges mentioned above.

During the years ended October 31, 2021, 2020 and 2019, we wrote off residential land options and approval and engineering costs totaling $1.6 million, $6.8 million and $3.6 million, respectively, which are included in the total land charges mentioned above.

Option, approval and engineering costs are written off when a community’s pro forma profitability is not projected to produce adequate returns on the investment commensurate with the risk and when we believe it is probable we will cancel the option, or when a community is redesigned, engineering costs related to the initial design are written off.

Such write-offs were located in all segments in fiscal 2020, 2019 and 2018.

The inventory impairments amounted to $2.0 million, $2.7 million and $2.1 million for the years ended October 31, 2020, 2019 and 2018, respectively.

It is difficult to predict impairment levels, and should it become necessary or desirable to have additional land sales, further lower prices, or should the estimates or expectations used in determining estimated cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional impairments.

Such write-offs were located in all segments in fiscal 2021, 2020 and 2019.

The inventory impairments amounted to $2.0 million, $2.0 million and $2.7 million for the years ended October 31, 2021, 2020 and 2019, respectively.

It is difficult to predict impairment levels, and should it become necessary or desirable to have additional land sales, lower prices, or should the estimates or expectations used in determining estimated cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional impairments.

Below is a breakdown of our lot option walk-aways and impairments by segment for fiscal 2021.

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Land sales are ancillary to our residential homebuilding operations and are expected to continue in the future but may significantly fluctuate up or down. Although we budget land sales, they are often dependent upon receiving approvals and entitlements, the timing of which can be uncertain. As a result, projecting the amount and timing of land sales is difficult.

There were seven land sales during the year ended October 31, 2020, compared to six in the prior year, resulting in a $7.7 million increase in land sales revenue.

There were six land sales in the year ended October 31, 2019, compared to four in the prior year. Despite an increase in the number of land sales in fiscal 2019, there was a significant land sale in the Northeast segment in fiscal 2018 which resulted in a $15.1 million decrease in land sales revenue during fiscal 2019.

Land sales and other revenues increased $6.6 million for the year ended October 31, 2020 and decreased $18.6 million for the year ended October 31, 2019 compared to the prior year.

There were 11 land sales during the year ended October 31, 2021, compared to seven in the prior year, resulting in an $8.5 million increase in land sales revenue.

There were seven land sales in the year ended October 31, 2020, compared to six in the year ended October 31, 2019, resulting in a $7.7 million increase in land sales revenue.

Land sales and other revenues increased $7.7 million for the year ended October 31, 2021 compared to the prior year and increased $6.6 million for the year ended October 31, 2020 compared to the prior year.

Other revenues include income from contract cancellations where the deposit has been forfeited due to contract terminations, interest income, cash discounts and miscellaneous one-time receipts.

The increase from fiscal 2019 to fiscal 2020 and the decrease from fiscal 2018 to fiscal 2019 was mainly due to the fluctuations in land sales revenue noted above.

The increase from fiscal 2020 to fiscal 2021 and from fiscal 2019 to fiscal 2020 was mainly due to the fluctuations in land sales revenue noted above.

Homebuilding Selling, General and Administrative

Homebuilding selling, general and administrative (“SGA”) expenses decreased $5.5 million to $161.3 million for the year ended October 31, 2020 as compared to the year ended October 31, 2019.

The decrease was primarily attributed to lower selling overhead and advertising costs, as a result of the reduction of our community count and a reduced need for advertising as home sales have improved.

SGA expenses increased $7.6 million to $166.8 million for the year ended October 31, 2019 as compared to the year ended October 31, 2018.

The increase was primarily related to a decrease of unconsolidated joint venture management fees received of $4.2 million, which offset general and administrative expenses, as a result of less unconsolidated joint venture deliveries, and $3.3 million less of a reduction of our construction defect reserves (a $6.9 million reduction in fiscal 2019 as compared to $10.2 million reduction in fiscal 2018) based on our annual actuarial analysis.

Homebuilding selling, general and administrative (“SGA”) expenses increased $8.6 million to $169.9 million for the year ended October 31, 2021 as compared to the year ended October 31, 2020.

The increase was primarily attributed to a change in volume of our unconsolidated joint venture deliveries, and an increase in compensation expense.

SGA expenses decreased $5.5 million to $161.3 million for the year ended October 31, 2020 as compared to the year ended October 31, 2019. The decrease was primarily attributed to lower selling overhead and advertising costs, as a result of the reduction of our community count and a reduced need for advertising as home sales improved.

Homebuilding Operations by Segment

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Segment Analysis (Dollars in thousands, except average sales price)

Year Ended October 31,

Years Ended October 31,

Homebuilding revenue

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Homebuilding revenue

(Loss) income before income taxes

Income (loss) before income taxes

Homes delivered

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Northeast –

Homebuilding revenues increased 54.4% in fiscal 2020 compared to fiscal 2019 primarily due to an 81.3% increase in homes delivered and a $9.0 million increase in land sales and other revenue, partially offset by a 17.1% decrease in average selling price.

The decrease in average sales price was the result of new communities delivering smaller single family homes, townhomes and affordable-housing homes in mid to higher-end submarkets of the segment in fiscal 2020 compared to some communities delivering in fiscal 2019 that had higher priced, single family homes in higher-end submarkets of the segment that are no longer delivering.

Homebuilding revenues decreased 25.8% in fiscal 2021 compared to fiscal 2020 primarily due to a 42.2% decrease in homes delivered and a $14.2 million decrease in land sales and other revenue, partially offset by a 38.2% increase in average sales price.

The increase in average sales price was mainly the result of price increases in certain communities.

Income before income taxes decreased $7.4 million to $22.9 million, which was mainly due to the decrease in homebuilding revenues discussed above, a $1.6 million increase in selling, general and administrative costs and a $7.4 million decrease in income from unconsolidated joint ventures, partially offset by an increase in gross margin percentage before interest expense for fiscal 2021 compared to fiscal 2020. 

Homebuilding revenues increased 54.4% in fiscal 2020 compared to fiscal 2019 primarily due to an 81.3% increase in homes delivered and a $9.0 million increase in land sales and other revenue, partially offset by a 17.1% decrease in average selling price.

The decrease in average sales price was the result of new communities delivering smaller single family homes, townhomes and affordable-housing homes in mid to higher-end submarkets of the segment in fiscal 2020 compared to some communities delivering in fiscal 2019 that had higher priced, single family homes in higher-end submarkets of the segment that are no longer delivering.

Also impacting the decrease in average sales price was an increase in pricing concessions and a decrease in location premiums in certain communities. 

Income before income taxes increased $9.4 million to $30.4 million, which was mainly due to the increase in homebuilding revenues discussed above, a $0.5 million decrease in selling, general and administrative costs and a slight increase in gross margin percentage before interest expense for fiscal 2020 compared to fiscal 2019.

This increase was partially offset by a $8.2 million decrease in income from unconsolidated joint ventures for fiscal 2020 compared to fiscal 2019.

Homebuilding revenues increased 6.9% in fiscal 2019 compared to fiscal 2018 primarily due to a 7.9% increase in homes delivered and a 12.9% increase in average selling price, partially offset by a $12.8 million decrease in land sales and other revenue.

The increase in average sales price was the result of new communities delivering higher priced, larger single family homes and townhomes in higher-end submarkets of the segment in fiscal 2019 compared to certain communities delivering in fiscal 2018 that had lower priced, single family homes and townhomes in lower-end submarkets of the segment that are no longer delivering.

Income before income taxes increased $0.1 million to $21.0 million, which was mainly due to the increase in homebuilding revenues discussed above and the increase in gross margin percentage before interest expense for fiscal 2019 compared to fiscal 2018.

This increase was partially offset by a $1.0 million decrease in income from unconsolidated joint ventures and a $0.5 million increase in selling, general and administrative costs for fiscal 2019 compared to fiscal 2018.

Income before income taxes increased $9.4 million to $30.4 million, which was mainly due to the increase in homebuilding revenues discussed above, a $0.5 million decrease in selling, general and administrative costs and a slight increase in gross margin percentage before interest expense for fiscal 2020 compared to fiscal 2019.

This increase was partially offset by an $8.2 million decrease in income from unconsolidated joint ventures for fiscal 2020 compared to fiscal 2019.

Mid-Atlantic –

Homebuilding revenues increased 15.4% in fiscal 2021 compared to fiscal 2020 primarily due to a 12.5% increase in homes delivered and a 2.8% increase in average sales price.

The increase in average sales price was the result of new communities delivering higher priced, larger single family homes and townhomes in higher-end submarkets of the segment in fiscal 2021 compared to some communities delivering in fiscal 2020 that had lower priced, smaller single family homes and townhomes in lower-end submarkets of the segment that are no longer delivering. Also impacting the increase in the average sales price was price increases in certain communities.

Income before income taxes increased $27.0 million to $61.6 million, mainly due to the increase in homebuilding revenues discussed above, a $0.6 million decrease in selling, general and administrative costs and an increase in gross margin percentage before interest expense for fiscal 2021 compared to fiscal 2020.

Homebuilding revenues increased 13.0% in fiscal 2020 compared to fiscal 2019 primarily due to a 15.8% increase in homes delivered, partially offset by a 2.5% decrease in average sales price.

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Income before income taxes increased $20.2 million to $34.6 million, mainly due to the increase in homebuilding revenues discussed above, a $2.0 million decrease in selling, general and administrative costs, a $0.8 million decrease in inventory impairment loss and land option write-offs and an increase in gross margin percentage before interest expense for fiscal 2020 compared to fiscal 2019.

Homebuilding revenues increased 0.7% in fiscal 2019 compared to fiscal 2018 primarily due to a 3.8% increase in average sales price, partially offset by a 3.0% decrease in homes delivered.

The increase in average sales price was the result of new communities delivering higher priced, larger single family homes in higher-end submarkets of the segment in fiscal 2019 compared to certain communities delivering in fiscal 2018 that had lower priced, single family homes and townhomes in mid to higher-end submarkets of the segment that are no longer delivering.

Income before income taxes decreased $4.4 million to $14.3 million, due mainly to a $0.6 million increase in inventory impairment loss and land option write-offs and a slight decrease in gross margin percentage before interest expense for fiscal 2019 compared to fiscal 2018.

Midwest –

Homebuilding revenues increased 16.4% in fiscal 2021 compared to fiscal 2020 primarily due to a 6.3% increase in homes delivered, a 3.7% increase in average sales price and a $13.9 million increase in land sales and other revenue.

The increase in average sales price was mainly the result of price increases in certain communities.

Income before income taxes was $18.4 million in fiscal 2021, an improvement of $20.2 million compared to a loss before income taxes of $1.8 million in fiscal 2020. The increase was primarily due to the increase in homebuilding revenues discussed above, a $3.5 million decrease in selling, general and administrative costs and a $5.5 million decrease in inventory impairment loss and land option write-offs, while gross margin percentage before interest expense was flat for fiscal 2021 compared to fiscal 2020.

Homebuilding revenues increased 10.4% in fiscal 2020 compared to fiscal 2019 primarily due to a 6.9% increase in homes delivered and a 3.5% increase in average sales price.

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Loss before income taxes increased $1.2 million to a loss of $1.8 million in fiscal 2020 compared to fiscal 2019. The increase was primarily due to a $3.2 million increase in inventory impairment loss and land option write-offs, while gross margin percentage before interest expense was flat for fiscal 2020 compared to fiscal 2019.

Homebuilding revenues increased 4.0% in fiscal 2019 compared to fiscal 2018 primarily due to a 2.7% increase in homes delivered and a 1.0% increase in average sales price.

The increase in average sales price was the result of new communities delivering higher priced, larger single family homes in higher-end submarkets of the segment in fiscal 2019 compared to certain communities delivering in fiscal 2018 that had lower priced, smaller single family homes in lower-end submarkets of the segment that are no longer delivering. Also impacting the increase in average sales price was higher option revenue in certain communities.

Income before income taxes decreased $2.2 million to a loss of $0.6 million in fiscal 2019 compared to fiscal 2018. The decrease was primarily due to a $2.0 million increase in selling, general and administrative costs and a $2.1 million increase in inventory impairment loss and land option write-offs, while gross margin percentage before interest expense was flat for fiscal 2019 compared to fiscal 2018.

Southeast –

Homebuilding revenues increased 22.7% in fiscal 2021 compared to fiscal 2020 primarily due to a 9.9% increase in homes delivered, an 8.2% increase in average sales price and a $9.1 million increase in land sales and other revenue. The increase in average sales price was the result of new communities delivering higher priced, larger single family homes in higher-end submarkets of the segment in fiscal 2021 compared to some communities delivering in fiscal 2020 that had lower priced, smaller single family homes and townhomes in lower-end submarkets of the segment that are no longer delivering. Also impacting the increase in average sales price was price increases in certain communities.

Income before income taxes increased $16.4 million to $17.8 million in fiscal 2021 compared to fiscal 2020, mainly due to the increase in homebuilding revenue discussed above, a $1.2 million increase in income from unconsolidated joint ventures and an increase in gross margin percentage before interest expense for fiscal 2021 compared to fiscal 2020.

Homebuilding revenues increased 5.7% in fiscal 2020 compared to fiscal 2019 primarily due to a 0.6% increase in homes delivered and a 5.1% increase in average sales price.

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Income before income taxes of $1.4 million in fiscal 2020 represented an $11.4 million improvement from the prior year due to the increase in homebuilding revenue discussed above, a $3.9 million decrease in selling, general and administrative costs and an increase in gross margin percentage before interest expense for fiscal 2020 compared to fiscal 2019.

Homebuilding revenues decreased 8.9% in fiscal 2019 compared to fiscal 2018 primarily due to an 8.6% decrease in homes delivered, partially offset by a 1.0% increase in average sales price.

The increase in average sales price was the result of new communities delivering higher priced, single family homes in higher-end submarkets of the segment in fiscal 2019 compared to certain communities delivering in fiscal 2018 that had lower priced, smaller single family homes and townhomes in lower-end submarkets of the segment that are no longer delivering.

Also impacting the increase in average sales price was higher option revenue in certain communities. 

Loss before income taxes increased $0.1 million to a loss of $10.0 million due to the decrease in homebuilding revenue discussed above and a $1.2 million increase in selling, general and administrative costs, partially offset by a $0.6 million decrease in inventory impairment loss and land option write-offs, a $3.3 million improvement in loss from unconsolidated joint ventures to income and a slight increase in gross margin percentage before interest expense for fiscal 2019 compared to fiscal 2018.

Southwest –

Homebuilding revenues increased 18.2% in fiscal 2020 compared to fiscal 2019 primarily due to a 19.7% increase in homes delivered, while average sales price was essentially flat with a 1.0% decrease in fiscal 2020.

Homebuilding revenues increased 21.4% in fiscal 2021 compared to fiscal 2020 primarily due to a 13.3% increase in homes delivered and a 7.1% increase in average sales price.

The increase in the average sales price was due to price increases in certain communities.

Income before income taxes increased $47.7 million to $115.8 million in fiscal 2021 mainly due to the increase in homebuilding revenues discussed above, a $0.4 million decrease in inventory impairment loss and land option write-offs and an increase in gross margin percentage before interest expense for fiscal 2021 compared to fiscal 2020.

Income before income taxes increased $34.7 million to $68.2 million in fiscal 2020 mainly due to the increase in homebuilding revenues discussed above and an increase in gross margin percentage before interest expense for fiscal 2020 compared to fiscal 2019.

Homebuilding revenues decreased 1.4% in fiscal 2019 compared to fiscal 2018 primarily due to a 0.4% decrease in homes delivered and a 1.3% decrease in average sales price.

The decrease in average sales price was the result of new communities delivering lower priced, smaller single family homes in lower-end submarkets of the segment in fiscal 2019 compared to some communities delivering in fiscal 2018 that had higher priced, larger single family homes in higher-end submarkets of the segment that are no longer delivering.

Income before income taxes decreased $16.4 million to $33.5 million in fiscal 2019 mainly due to the decrease in homebuilding revenues discussed above and a decrease in gross margin percentage before interest expense for fiscal 2019 compared to fiscal 2018, partially offset by a $2.8 million increase in income from unconsolidated joint ventures and a $1.9 million decrease in selling, general and administrative costs.

West –

Homebuilding revenues increased 35.6% in fiscal 2021 compared to fiscal 2020 primarily due to a 16.1% increase in homes delivered and a 16.8% increase in average sales price.

The increase in average sales price was the result of new communities delivering higher priced, larger single family homes in higher-end submarkets of the segment in fiscal 2021 compared to some communities delivering in fiscal 2020 that had lower priced, smaller single family homes in lower-end submarkets of the segment that are no longer delivering.

Also impacting the increase in average sales price was price increases in certain communities. 

Income before income taxes increased $66.1 million to $82.5 million in fiscal 2021 compared to the prior year mainly due to the increase in homebuilding revenues discussed above and an increase in gross margin percentage before interest expense for fiscal 2021 compared to the prior year, partially offset by a $1.3 million increase in inventory impairment loss and land option write-offs.

Homebuilding revenues increased 11.1% in fiscal 2020 compared to fiscal 2019 primarily due to a 6.3% increase in homes delivered and a 4.5% increase in average sales price.

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Income before income taxes decreased $23.6 million to $16.4 million in fiscal 2020 compared to the prior year due mainly to a significant decrease in gross margin percentage before interest expense, partly as a result of increases in estimated land development costs in some of our communities in the segment.

Homebuilding revenues increased 10.6% in fiscal 2019 compared to fiscal 2018 primarily due to a 16.7% increase in homes delivered, partially offset by a 5.2% decrease in average sales price.

Income before income taxes decreased $8.0 million to $40.0 million in fiscal 2019 compared to the prior year due mainly to a $4.1 million increase in selling, general and administrative costs, a $3.2 million decrease in income from unconsolidated joint ventures to a loss and a slight decrease in gross margin percentage before interest expense.

Financial Services

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Our risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments.

For the years ended October 31, 2020, 2019 and 2018, our conforming conventional loan originations as a percentage of our total loans were 69.1%, 65.8% and 69.8%, respectively.

For the years ended October 31, 2021, 2020 and 2019, our conforming conventional loan originations as a percentage of our total loans were 71.9%, 69.1% and 65.8%, respectively.

FHA/VA loans represented 27.4%, 29.8%, and 29.8%, respectively, of our total loans.

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Profits and losses relating to the sale of mortgage loans are recognized when legal control passes to the buyer of the mortgage and the sales price is collected.

During the years ended October 31, 2020, 2019 and 2018, financial services provided a $32.1 million, $17.6 million and $18.2 million pretax profit, respectively.

In fiscal 2020, financial services pretax profit increased $14.5 million from the prior year primarily due to the increase in homebuilding deliveries and an increase in the average price of the loans settled. Also impacting the increase in fiscal 2020 was the increase in the basis point spread between the loans originated and the implied rate from the sale of the loans.

In fiscal 2019, financial services pretax profit decreased $0.6 million from the prior year primarily due to the geographic mix of title company activity within each period.

In the market areas served by our wholly owned mortgage banking subsidiaries, 69.3%, 70.9%, and 72.4% of our noncash home buyers obtained mortgages originated by these subsidiaries during the years ended October 31, 2020, 2019 and 2018, respectively.

During the years ended October 31, 2021, 2020 and 2019, financial services provided a $37.6 million, $32.1 million and $17.6 million pretax profit, respectively.

In fiscal 2021 and 2020, financial services pretax profit increased $5.5 million and $14.5 million, respectively, from the respective prior year primarily due to the increase in homebuilding deliveries and an increase in the average price of the loans settled. Also impacting the increase in fiscal 2021 and 2020 was the increase in the basis point spread between the loans originated and the implied rate from the sale of the loans.

In the market areas served by our wholly owned mortgage banking subsidiaries, 68.3%, 69.3%, and 70.9% of our noncash home buyers obtained mortgages originated by these subsidiaries during the years ended October 31, 2021, 2020 and 2019, respectively.

Corporate General and Administrative

Corporate general and administrative expenses include the operations at our headquarters in New Jersey.

These expenses include payroll, stock compensation, legal expenses, rent and facility costs and other costs associated with our executive offices, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, national and digital marketing, construction services and administration of insurance, quality and safety.

Corporate general and administrative expenses increased $14.2 million for the year ended October 31, 2020 compared to the year ended October 31, 2019 and decreased $3.3 million for the year ended October 31, 2019 compared to the year ended October 31, 2018.

The increase in expense for fiscal 2020 was mainly due to an increase in stock compensation expense, primarily attributed to our long-term incentive plans achieving above target metrics for the plan years 2018 and 2019 as a result of current year profit.

Also contributing to the increase in expense for fiscal 2020 were additional costs pertaining to software licenses and support fees for cybersecurity and monitoring services.

The decrease in expense for fiscal 2019 was due to decreased legal fees (including litigation) related to financing transactions and higher costs for ongoing litigations involving the Company during fiscal 2018 which did not recur in fiscal 2019, along with a decrease in stock compensation expense, primarily due to the cancellation of certain stock awards that did not meet their performance criteria in fiscal 2019.

Also impacting the decrease for fiscal 2019 was an increase in the adjustment to reserves for self-insured medical claims, which were reduced based on claim estimates.

These expenses include payroll, stock compensation, legal expenses, rent and facility costs and other costs associated with our executive offices, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, national and digital marketing, construction services and administration of insurance, quality and safety.

Corporate general and administrative expenses increased $26.1 million for the year ended October 31, 2021 compared to the year ended October 31, 2020 and increased $14.2 million for the year ended October 31, 2020 compared to the year ended October 31, 2019.

The increase in expense for fiscal 2021 was mainly due to the increase in total variable compensation expenses related to performance based compensation attributable to improved profitability and to the grants of phantom stock awards under our 2019 LTIP.

The Company's phantom shares issued under the 2019 LTIP are classified as liabilities under the applicable accounting guidance, which requires remeasurement of the awards at each reporting period and consequently, has resulted in additional expense in fiscal 2021 as a result of movement in our stock price during the fiscal year.

Had equity-classified shares been utilized for the 2019 LTIP, there would not have been additional expense recognized related to the movement in our stock price.

The increase in expense for fiscal 2020 was mainly due to an increase in stock compensation expense, primarily attributed to our long-term incentive plans achieving above target metrics for the plan years 2018 and 2019 as a result of fiscal year 2020 profit.

Also contributing to the increase in expense for fiscal 2020 were additional costs pertaining to software licenses and support fees for cybersecurity and monitoring services.

Other Interest

Other interest increased $13.7 million to $103.8 million for the year ended October 31, 2020 compared to October 31, 2019, and decreased $13.2 million to $90.1 million for the year ended October 31, 2019 compared to October 31, 2018.

Our assets that qualify for interest capitalization (inventory under development) are less than our debt, and therefore a portion of interest not covered by qualifying assets must be directly expensed. In fiscal 2020, the increase was because we incurred more interest from our third-party inventory financing during fiscal 2020, and as a result of the financing transactions we completed in the fourth quarter of fiscal 2019 and first quarter of fiscal 2020.

In fiscal 2019, the decrease was due to our assets that qualify for interest capitalization increasing by more than our debt, therefore the amount of directly expensed interest decreased. 

Gain (Loss) on Extinguishment of Debt

Other interest decreased $26.1 million to $77.7 million for the year ended October 31, 2021 compared to October 31, 2020, and increased $13.7 million to $103.8 million for the year ended October 31, 2020 compared to October 31, 2019.

Our assets that qualify for interest capitalization (inventory under development) are less than our debt, and therefore a portion of interest not covered by qualifying assets must be directly expensed. In fiscal 2021, the decrease was primarily due to a decrease in nonrecourse mortgages, inventory financing arrangements and total notes payable as compared to the prior fiscal year. In fiscal 2020, the increase was because we incurred more interest from our third-party inventory financing during fiscal 2020, and as a result of the financing transactions we completed in the fourth quarter of fiscal 2019 and the first quarter of fiscal 2020. 

(Loss) Gain on Extinguishment of Debt

On July 30, 2021, the Company redeemed in full all $111.2 million aggregate principal amount of its 10.0% Senior Secured Notes due 2022.

The aggregate purchase price for this redemption was $111.7 million, which included accrued and unpaid interest.

This redemption resulted in a loss on extinguishment of debt of $0.3 million for the year ended October 31, 2021, net of the write-off of unamortized financing costs and fees.

The loss from the redemption is included in the Consolidated Statement of Operations as "Loss on extinguishment of debt".

On August 2, 2021, the Company redeemed in full all $69.7 million aggregate principal amount of its 10.5% Senior Secured Notes due 2024.

The aggregate purchase price for this redemption was $71.9 million, which included accrued and unpaid interest.

This redemption resulted in a loss on extinguishment of debt of $3.4 million for the year ended October 31, 2021, net of the write-off of unamortized discounts, financing costs and fees.

The loss from the redemption is included in the Consolidated Statement of Operations as "Loss on extinguishment of debt".

On December 10, 2019, K.

8 unchanged sentences

As a result of the financing transactions we consummated on October 31, 2019 and discussed under Note 9 to the Consolidated Financial Statements, we incurred a $42.4 million loss on extinguishment of debt, a majority of which was non-cash.

We incurred a $7.5 million loss on extinguishment of debt during the year ended October 31, 2018 due to several financing and refinancing transactions completed in fiscal 2018 as described in Note 9 to the Consolidated Financial Statements.

Income from Unconsolidated Joint Ventures

Income from unconsolidated joint ventures consists of our share of the earnings or losses of our joint ventures.

Income from unconsolidated joint ventures decreased $12.3 million for the year ended October 31, 2020 from income of $28.9 million for the year ended October 31, 2019 to income of $16.6 million.

The decrease was primarily due to the recognition of our share of income from certain of our joint ventures delivering fewer homes in fiscal 2020 as compared to the prior 

Also impacting the decrease was income recorded in the first quarter of fiscal 2019 related to the return of capital from an unconsolidated joint venture for which we had previously written-off our investment.

Income from unconsolidated joint ventures increased $4.9 million for the year ended October 31, 2019 from income of $24.0 million for the year ended October 31, 2018 to income of $28.9 million.

The increase is due to our share of income from certain of our joint ventures delivering more homes resulting in increased profits for fiscal 2019 compared to fiscal 2018.

Total Taxes 

The total income tax expense of $4.5 million, $2.4 million, and $3.6 million for the years ending October 31, 2020, 2019 and 2018, respectively, was primarily related to state tax expense from income generated in states where we do not have net operating loss ("NOL") carryforwards to offset the current year income.

In addition, the expense for the year ended October 31, 2020 was primarily related to state tax expense from the impact of a cancellation of debt income recorded for tax purposes but not for GAAP purposes, creating a permanent difference. 

Deferred federal and state income tax assets primarily represent the deferred tax benefits arising from NOL carryforwards and temporary differences between book and tax income which will be recognized in future years as an offset against future taxable income.

Income from unconsolidated joint ventures decreased $7.8 million for the year ended October 31, 2021 from income of $16.6 million for the year ended October 31, 2020 to income of $8.8 million and decreased $12.3 million for the year ended October 31, 2020 from income of $28.9 million for the year ended October 31, 2019 to income of $16.6 million.

In both cases, the decreases were primarily due to the recognition of our share of income from certain of our joint ventures delivering fewer homes in fiscal 2021 compared to fiscal 2020 and in fiscal 2020 as compared to fiscal 2019.

Also impacting the decrease in fiscal 2020 was income recorded in the first quarter of fiscal 2019 related to the return of capital from an unconsolidated joint venture for which we had previously written-off our investment. 

The total benefit for the year ended October 31, 2021 was $418.0 million.

The benefit was primarily due to the reversal of a substantial portion of our valuation allowance previously recorded against our deferred tax assets.

The total income tax expense of $4.5 million and $2.4 million for the years ended October 31, 2020 and 2019, respectively, was primarily related to state tax expense from income generated in states where we do not have net operating loss ("NOL") carryforwards to offset the current year income. In addition, the expense for the year ended October 31, 2020 was also related to state tax expense from the impact of a cancellation of debt income recorded for tax purposes but not for GAAP purposes, creating a permanent difference.

Deferred federal and state income tax assets ("DTAs") primarily represent the deferred tax benefits arising from NOL carryforwards and temporary differences between book and tax income which will be recognized in future years as an offset against future taxable income.

If the combination of future years’

income (or loss) and the reversal of the timing differences results in a loss, such losses can be carried forward to future years.

In accordance with ASC 740, we evaluate our deferred tax assets (“DTAs”) quarterly to determine if valuation allowances are required. ASC 740 requires that companies assess whether valuation allowances should be established based on the consideration of all available evidence using a “more likely than not”

standard.   

As of October 31, 2020, we considered all available positive and negative evidence to determine whether, based on the weight of that evidence, our valuation allowance for our DTAs was appropriate in accordance with ASC 740.

As listed in Note 11 to the Consolidated Financial Statements, in order of the weighting of each factor is the available positive and negative evidence that we considered in determining that it is more likely than not that all of our DTAs will not be realized.

In analyzing these factors, overall the negative evidence, both objective and subjective, outweighed the positive evidence.

Based on this analysis, we determined that the current valuation allowance for deferred taxes of $577.5 million as of October 31, 2020, which fully reserves for our DTAs, is appropriate.

Off-Balance Sheet Financing

In the ordinary course of business, we enter into land and lot option purchase contracts in order to procure land or lots for the construction of homes.

Lot option contracts enable us to control significant lot positions with a minimal capital investment and substantially reduce the risks associated with land ownership and development.

At October 31, 2020, we had $88.9 million in option deposits in cash and letters of credit to purchase land and lots with a total purchase price of $1.3 billion.

Our financial exposure is generally limited to forfeiture of the nonrefundable deposits, letters of credit and other nonrefundable amounts incurred.

We have no material third-party guarantees.

Unconsolidated Joint Ventures  

As discussed in Note 20 –

Our unconsolidated joint ventures had total combined assets of $540.2 million at October 31, 2020 and $539.7 million at October 31, 2019.

Our investments in unconsolidated joint ventures totaled $103.2 million at October 31, 2020 and $127.0 million at October 31, 2019.

As of October 31, 2020 and 2019, our unconsolidated joint ventures had outstanding debt totaling $117.2 and $186.9 million, respectively, under separate construction loan agreements with different third-party lenders and affiliates of certain investment partners to finance their respective land development activities, with the outstanding debt secured by the corresponding underlying property and related project assets and non-recourse to us.

We do not believe that our existing exposure under our guaranty and indemnity obligations related to the outstanding debt is material to our consolidated financial statements.

What changed 10-K

Item 5. Market for Registrant’s Common Equity